Sisecam Resources LP
Q3 2018 Earnings Call Transcript

Published: 6 Nov 2018

[Operator:]

Welcome to Ciner Resources Third Quarter 2018 Earnings Conference Call and Webcast. Hosting the call today from Ciner Resources is Mr. Kirk Milling, Chief Executive Officer. He is joined by Scott Humphrey, Chief Financial Officer. Today’s call is being recorded. [Operator Instructions] It is now my pleasure to turn the floor over to Scott Humphrey. You may begin.

[Scott Humphrey:]

Thank you, Maria. Good morning. This is Scott Humphrey, CFO for Ciner Resources. Thank you for joining us to discuss our third quarter 2018 earnings. Kirk Milling, our CEO, will discuss some highlights from the quarter. I will then provide additional details related to our financials, and Kirk will follow that with our outlook for the rest of 2018, we will then take your questions. Before we begin, I would like to remind you that the comments included in today’s conference call constitute forward-looking statements. Actual results may differ materially from the results suggested by these comments for a number of reasons, which are discussed in more detail on the company’s SEC filings. Certain financial measures discussed during this call are considered pro forma and are, therefore, non-GAAP financial measures. Reconciliations of those non-GAAP financials can be found in our earnings press release. I will now turn the call over to Kirk.

[Kirk Milling:]

Thanks, Scott, and good morning, everyone. Welcome to Ciner Resources third quarter 2018 earnings call. While our operating performance improved sequentially versus the second quarter, we are still not producing at the levels we were expecting. Production volume in the quarter was 657,000 tons, down about 3% compared to last year, but up 13% sequentially compared to the second quarter. Lower production levels combined with higher levels of CapEx led our DCF to be down almost 11% compared to last year. Our operations team has put a lot of effort into improving the reliability of our production assets and year-on-year, we are beginning to see tangible evidence of improvement in our unplanned downtime as compared to historical levels. However, our trona ore quality was off 4% in the quarter compared to last year. For perspective, this represents a 34% increase in the amount of impurities we have to deal with in our surface assets in order to produce the quality of soda ash to meet our customer expectations. Unfortunately, our assets are not designed to withstand this kind of increase in impurities without having an impact on our soda ash output. While we can take some tactical steps to modestly improve the ore quality, sometimes it is the nature of mining that you would go through periods where the ore body will contain more impurities. Overcoming this is not something we can deal with from a process perspective. We will have to make capital investments to ensure sustainability of production levels when we encounter periods of lower ore quality. We are in the process of reevaluating our investment plans to improve the success rate, not only of sustaining production levels in the near term, but also to continue towards our stated goal of reaching at least 3 million tons per year of soda ash production. So, while production levels were below expectations, the strength of the soda ash market continues to outpace our expectations. International prices were up 6.8% in the quarter compared to last year once you strip out the freight impact from our affiliate sales. The new Turkish production volume in Kazan continues to ramp up toward an expected 2.5 million tons of annual capacity, but strong demand has been able to absorb all the new incremental capacity. As a result, we have, again, raised our outlook on international pricing by an additional 2% for the full year comparison. Additionally, we raised expectations for domestic demand by an additional 25,000 tons. The quarter also marked the first delivery of soda ash from Turkey to Ciner’s new terminal facility located in Norfork, Virginia. Our strategy is to supplement our supply from Wyoming with additional supply from Turkey onto the Eastern Seaboard of the U.S. Ciner Resources will manage all aspects of the sale with our customers to ensure a single point of contact with a flexibility to supply from either sourcing location. And Ciner Resources will earn a commission on these sales, which we will use to offset our SG&A expenses. This will bring added security at supply to our customers, while also beginning to leverage Ciner’s global network, which we think brings new value to our assets in Wyoming. Now I’m going to turn the call over to Scott who will share the financial results in more detail.

[Scott Humphrey:]

Thanks, Kirk, and thanks, everyone, for joining us on the call and for your continued interest in Ciner Resources. Today, I’ll provide some detail around our third quarter performance and how those results compare to the outlook we provided back in February. I will discuss the significant financial drivers from the quarter, including our capital spending program and some key metrics we utilize to evaluate our business. Let me start with a recap of our actual results versus our full year outlook. Total volumes sold decreased 3% in the quarter compared to Q3 of 2017 and 4.5% on a year-to-date basis versus our revised outlook of down 3% to 5% in 2018. Production volume was lower in the quarter due to the ore grade issues Kirk discussed already. Domestic volume grew approximately 50,000 short tons in Q3 and approximately 137,000 short tons year-to-date, so we have increased our range for the year to an increase of between 150,000 to 175,000 tons above last year. Our domestic sales price increased by 1.7% in the quarter and 0.2% year-to-date, so we have also increased our outlook for domestic pricing to be flat this year compared to 2017. Overall, international pricing was down 3.7% in the quarter. We recognized higher international pricing during 2017 due to increased sales to our affiliate. These sales included full inland and ocean freight costs in our results compared to ANSAC volumes, which only contemplate rail freight to the U.S. ports. International prices, excluding the CIDT effect on sales from last year increased by 6.8% in the quarter and 6.7% year-over-year. As Kirk mentioned already, we revised our forecast for international pricing to increase in the range of 4% to 6%. The comparison will get tougher as the year goes on, as international pricing, excluding CIDT increased every quarter during 2017. This is the second quarter in a row that we’ve raised our outlook for international pricing as the soda ash market continues to display strong fundamental. Maintenance capital spending was $2.6 million in the quarter and $7.5 million year-to-date. We still expect to be within our revised range of $15 million to $17 million for the full year. We have some large projects with payment scheduled in the fourth quarter. Expansion capital spending was $5.1 million in the third quarter and $20.6 million year-to-date. We’ve decreased our range for 2018 to $40 million to $50 million as some of our cash payments will push into the first quarter of 2019. One of our biggest projects in 2018 are ERP implementation project, remains on budget and on remains on budget and on schedule for our January 1, 2019, go-live date. Our revenues for the quarter were $123.4 million, up 0.7% compared to the third quarter of 2017. Year-to-date revenues were $354.5 million, down 3.9% compared to $368.8 million over the first nine months of 2017. The two main drivers for the reduction year-over-year were the reduced freight component of our sales and the production issues we have experienced during 2018. Domestic sales of $60 million in the quarter were up 25.3% compared to Q3 of 2017, driven by a 23.1% increase in sales volume. Year-to-date, domestic sales of $175.6 million were up 21% compared to $145.1 million through the first nine months of last year. International sales dropped 15% to $63.4 million in the quarter compared to $74.6 million in Q3 of 2017, due primarily to a 15.3% decrease in volumes sold related to our low ore grade. Year-to-date, international sales were down 20% from $223.7 million in 2017 to $178.9 million in 2018. The decrease was due to a 16.9% drop in volumes sold from the mix shift to more domestic volume in 2018 as well as the absence of our affiliate sales, which reduces pricing from the elimination of the higher freight component in our sales numbers. Cost of products sold in the quarter, including freight increased 2.3% from $88 million to $90 million as higher employee compensation and medical claims as well as higher freight costs drove the increase. Year-to-date, cost of products sold decreased from $268.4 million to $265.1 million. SG&A expenses of $6.1 million were $0.4 million higher than the prior year quarter, primarily driven by higher compensation and benefits and expenses related to our ERP implementation project. Year-to-date, SG&A expenses increased from $16.6 million to $18.9 million. The two primary drivers for the increase year-over-year were higher SG&A fees from ANSAC, which directly correlates to the volumes we sell to ANSAC and higher compensation and benefits as well as higher expenses from our ERP implementation project. Ciner Resources had basic earnings per unit of $0.44 in the third quarter of 2018, compared to $0.46 last year. On a year-to-date basis, earnings per unit was $1.78 in 2018, compared to $1.41 in the first three quarters of 2017. Most of the year-over-year increase was related to our litigation settlement with Rock Springs Royalty Company involving royalty expenses. Cash provided by operations was $131.4 million in the first nine months of 2018, compared to $45.2 million generated in the first three quarters of 2017. The increase in cash from operations was primarily due to a reduction in accounts receivable from our affiliate sales as well as the July collection of the litigation settlement. In 2017, we were ramping up sales to Turkey during the first half of the year, so the increase in AR was a drain on working capital. This contributed to a flip from using $37.3 million in cash for working capital through September of 2017, compared to generating cash of $33.6 million in 2018 from the reduction in working capital. We continue to maintain a very conservative balance sheet with a current leverage ratio of 0.83 times net debt to adjusted EBITDA. Next, let’s turn to discuss how all this translates into two of the key metrics we manage as an MLP, adjusted EBITDA and distributable cash flow. In the third quarter, we delivered $27.8 million in adjusted EBITDA, down 4.8% compared to $29.2 million in the third quarter of 2017. Year-to-date adjusted EBITDA of $99.5 million is a 16.6% increase versus $85.3 million in the first nine months of last year. Our distributable cash flow was $11.7 million in the quarter compared to $13.1 million in the third quarter of 2017 as our EBITDA was down 4.8% as discussed and our cash spent on maintenance CapEx increased. On a year-to-date basis, our distributable cash flow attributable to Ciner Resources was $44.5 million compared to $37.5 million in the first nine months of 2017. Our coverage ratio was 1.03 in the quarter. It is typical for our coverage ratio to be lower in the second and third quarter each year based on the timing of our two scheduled maintenance outages. On a year-to-date basis, our coverage ratio stands at 1.30 compared to 1.10 at this time last year. Now I’m going to turn the call back to Kirk for some comments on our outlook for the balance of 2018.

[Kirk Milling:]

Thanks, Scott. As we finish the year, we expect to see modest sequential improvement in production volumes and continued strength in both international pricing and domestic demand. The combination of these should set the stage for improved results in Q4. Our maintenance capital spend was up in the third quarter and we are forecasting higher spending in fourth quarter as well. Expansion capital has also been significantly higher this year, primarily driven by our ERP and cogeneration projects. Both are on budget and on schedule and we anticipate we will see positive cash flow impact from these investments starting next year. As I mentioned earlier, we are reevaluating our future investment plans to not only improve the sustainability of our existing assets, but also to increase our production levels up to at least three million tons per year. While we’ve made good strides on process improvement, it is clear more significant investment in our aging assets will be needed to make a step change in the reliability and sustainability of our production levels. We are still working on these plans and will provide more details in early 2019, along with our outlook for both volume and pricing. As we look toward the future, the global soda ash market continues to grow at GDP type rates, which represents an additional 1 million to 2 million tons per year of new soda ash demand. With limited new projects on the horizon outside of China and the new Turkish volume already absorbed into the market, momentum continues to build for prices to rise further as we head into the new year. So while we have had some short-term operational issues, the fundamentals for our business continue to look really attractive going forward. Thanks for your continued interest in Ciner Resources. This concludes our prepared remarks. Maria, please open the line for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Daniel Jester of Citi.

[Daniel Jester:]

Good morning, guys.

[Kirk Milling:]

Good morning, Dan.

[Daniel Jester:]

So just on the volume commentary that you provided, there has been a couple of challenges over the past two years, which you’ve discussed at length. But still your volume year-over-year are going to be down for the second year in a row. And you’re still talking about an aspiration of 3 million tons of production, which seems like a very significant increase off of what you’re going to do this year. So can you help us frame a little bit more some of the types of projects you’re thinking about? And maybe a bit on the time line to get there given some of the challenges you’ve had over the past year or two?

[Kirk Milling:]

Yes, so really in terms of the near term, I think what we’re really focused on is the process improvement projects that we undertook last year to improve reliability. We’re also doing some things in the short term to blend our ore to get our average ore grade up a bit. And just those things alone, we think get us back to the levels where we’ve been somewhere in the 2.65 million to 2.7 million ton range. I think as we think forward, we’ve had this aspiration of getting up to 3 million tons, but I think we’re coming to the realization it’s going to require a different level of CapEx. We’re evaluating those plans now. I’ll provide more detail and guidance on that, I think, as we head into the first quarter of next year because we’re still in the process of developing those. And then lastly, we’ve been working on a new project involving caustic soda to chemically calcine the ore, which we think will add just over 100,000 tons. The timing of that is still in the works. We anticipate that’ll start up either late 2019 or early 2020. Still TBD. Again, we’ll provide more guidance on that in early 2019.

[Daniel Jester:]

I guess, just at a high level given your comments on the favorable outlook for supply-demand into next year due to lower supply growth, can you talk about the relative attractiveness of growing natural soda ash-based production in the U.S.? And are there any constraints or cost issues, which we should be thinking about of your production relative to some other parts of the world?

[Kirk Milling:]

No. I don’t think so. I mean, the fundamentals look very good. I mean, the prices in Asia are extremely attractive right now and that’s the highest growth market around the world. There’s also good growth in LatAm from glass as well as lithium carbonate, which is also another extremely attractive market for us. I think as we look forward, obviously, we’re focused on logistics costs, freight economics. There are some ocean freight fuel issues, which could start to hit us in 2020, that’s on the horizon. But generally speaking, I think the market still looks very attractive for growth in natural soda ash.

[Daniel Jester:]

Okay. And then, at the end of your prepared comments, you talked about sort of the pricing dynamic into 2019. Have you had initial conversations with your customers about contracts for 2019? And is there any color that you can provide about that process?

[Kirk Milling:]

So I think it’s still a bit early. The negotiation season really starts in late Q3 and carries forward into Q4. I’d say on the domestic U.S. side, people are landing somewhere around a $10 increase. Obviously, that’s contract specific because in some cases you may have longer term agreements that have caps and things like that. But generally speaking, the market appears to be very robust, and I think we’ll see an uptick in pricing year-over-year. On the international side, I mean, I think it’s just supply tightness. We continue to see prices rise, you’ve seen it recently in China. But I think it’s still a bit early to know how that’s going to settle as we head into Q1 next year. So like I said, I’ll provide more guidance on that here at the – on the next quarterly call.

[Daniel Jester:]

Okay, great. And then, just one last one from me. It looks like the Chinese had actually been shutting down a bit of soda ash capacity over the past year or so. Can you just comment on how you see the net capacity change in China as you go into 2019? Thanks, guys.

[Kirk Milling:]

Yes. I mean, the question that’s a little bit difficult to understand right now is what you’re going to do from an environmental standpoint. They’ve had a lot of shutdown capacity for these environmental checks. But I’m sure the government’s also trying to figure out how to stimulate the economy and they don’t want to be too aggressive. So I’d say it’s a little bit of a mixed bag right now as we look into next year. We’re not expecting tremendous growth in China in next year nor we’re expecting much in the way of capacity.

[Daniel Jester:]

All right. Thank you very much.

[Operator:]

And thank you, ladies and gentlemen, that does conclude today’s Q&A session and conference call. You may now disconnect, and have a wonderful day.